Sunday, August 10, 2008

things you don't want to buy on credit

for me, there are very few things that i don't buy on credit because i pay off my balance every month, no matter how painful it is (some months, like january after christmas purchases are more painful than others).

my understanding is that this is not the norm. here are the things that i would hate to go into debt to buy:

1. food. unless you really are in extremely dire straits, i'd say buying food is probably a very bad use of credit, but it's something that i'd guess happens pretty often. i've personally observed a lot of my friends that dine out every day, morning, noon, and night. for the most part, these folks are buying meals that they aren't going to remember after a few hours, but they'll be paying for them for a lot longer. you think that $1 value meal is a good deal? what about after your revolving debt, late fees, and interest turns it into $25? you could have had a gourmet meal!

2. entertainment. this is the same story as above. it's already way too expensive to go watch a movie, but to put it on a credit card that you are only making minimum payments for? i hope the dark knight is worth $25.

3. gas. paying for gas at the pump is really convenient. but with gas at $4 a gallon, it costs me about $50 to fill up. how about twice that amount if you just making minimum payments?

now, i'm exaggerating a bit, but a good rule of thumb on revolving debt is that making just the minimum payments is going to end up costing you at least twice the amount of your original purchase. that's just the high level, though. think about the opportunity cost -- you could have put those fees to work for you, instead of paying someone else!

attentive spending

i came across an article by one of my favorite personal finance writers, scott burns, today entitled the power of attentive spending. he gives some examples in that article on what a typical family can do to save $500 a month.

this comes out to $6,000 a year of after tax "earnings". to put it in perspective, he notes:

Suppose, for instance, you have the good fortune to live in a no-income tax state and want to get all your return from a portfolio of common stocks. At a 15 percent tax rate on dividends, you’d have to collect gross dividends of $7,059 to net $6,000 a year. With the S&P 500 index yielding 2.29 percent, you’d need to have $308,246 in your portfolio.

that's a lot of money.

while i'm not sure that i can find $500 a month to trim out, i would say that finding any reasonable sum would certainly be worthwhile in light of that comparison.

the moral of the story: a penny saved is more than a penny earned (after tax implications).